Small business struggles after Krajbanka closure

  • 2011-11-30
  • From wire reports

RIGA - Experts believe that if Latvijas Krajbanka is liquidated, Latvia’s economy will sustain a loss of more than 100 million lats (142 million euros), business daily Dienas Bizness wrote on Nov. 24, reports The total amount of deposits in the bank is estimated at about 580 million lats, of which depositors could receive around 350 million lats from the Deposit Guarantee Fund.
Therefore, 230 million lats is the amount that will be lost for businesses and private individuals that have deposited money if the bank is liquidated.

Although it may be hoped that part of the money will be recovered after assets are sold, it has to be taken into account that at least 200 million lats of the money thus recovered will go to the state, as money will have to be borrowed from the State Treasury in order to pay the state-guaranteed amount of deposits, according to Financial and Capital Market Commission Chairwoman Irena Krumane’s recent statement.

As a result, much of the money that will be lost is made up of deposits by local governments and state and municipal enterprises, which cannot apply for state-guaranteed compensation. Also, many companies have deposited money in the bank so they could take out loans from Krajbanka.
Experts believe that the liquidation of Krajbanka will have a significant impact on the economy not only because large amounts of money will be lost, but also due to the now-impossible positive effect that these funds could have had on the national economy.

Analysts estimate that the damage to the economy could amount to 1 percent of gross domestic product. They agree that the liquidation of the bank will affect GDP growth in the fourth quarter this year and the first quarter of 2012.
Investment bank Prudentia partner Girts Rungainis believes that small and medium-sized enterprises whose sole bank accounts were in Krajbanka will be affected.

Economist Uldis Osis believes that the money lost with the liquidation of Krajbanka will have a profound effect on the Latvian economy. The loss could reach 200 million lats altogether, but much depends on how successful the sale of Krajbanka assets will be, given that a second wave of economic crisis may be coming.
Around 18,000, or 10 percent, of Latvian companies have accounts in Krajbanka, and for many of them this is the only bank account they have, which is why some of these companies are now facing the risk of insolvency.
However, state officials appear to not see this, as well as the likely effect of Krajbanka liquidation on GDP, unemployment and on budget revenue, he says.

If the state institutions do not do anything to help stranded companies that have accounts in Krajbanka to get working capital, these companies will be unable to pay their suppliers, honor their obligations to foreign clients, pay wages and taxes, another businessman said, wanting to remain anonymous.
If 200 million lats is withdrawn from the economy, that will not be very much when compared to 1 billion lats - the amount by which Latvian banks’ total loan portfolio reduces each year. However, there are companies that may find themselves insolvent due to money they lose in Krajbanka. But losses can still be averted if the state takes the right actions, believes businessman Janis Oslejs.